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The 1 Thing Microsoft Corporation Must Get Right With Its Low-End Windows Phones

Will Windows 10 be a game changer for Microsoft in the low-end smartphone market?

Microsoft's (NASDAQ:MSFT) Windows Phones accounted for just 2.8% of the global smartphone market in 2014, according to research firm Gartner. However, total shipments climbed 14% annually to 35.1 million units, indicating that the underdog OS is still growing in certain markets. While Windows Phone units rose, the broader smartphone market grew so much faster that Windows Phone still saw its market share decline.

One of Microsoft's main goals is to convince more feature phone owners in emerging markets to buy Lumias, which can be upgraded to Windows 10 later this year. To do so, Microsoft is selling new Lumias at low prices with plenty of bundled software. For example, Microsoft is bundling a free one-year subscription to Office 365 Personal, 1TB of OneDrive storage, and 60 free minutes of international Skype calls with its new Lumia 640 and 640 XL phones. The 5-inch 640 will cost just €139 ($156) without a contract.

The Lumia 640. Source: Microsoft

Can these cheap phones, free goodies, and the upcoming Windows 10 upgrade help Microsoft gain ground against Google(NASDAQ:GOOG)(NASDAQ:GOOGL), Android, and Apple(NASDAQ:AAPL) iOS in the smartphone market?

What Windows 10 on cheap phones mean for Google and AppleMicrosoft has two key strengths in mobile that Google and Apple lack. Despite its weakness in smartphones, Microsoft sold roughly 150 million feature phones last year through Nokia's former handset division. Last year, Microsoft added basic MSN and Bing services to several of those low-end devices. Second, over 90% of PCs worldwide run on Windows, and 70% run on Windows 7 or 8, which can be upgraded to the consumer version of Windows 10 for free later this year.

This means that Microsoft can leverage the familiarity of PC-based Windows services to grow its Lumia brand with first-time smartphone users. With Windows 10, Microsoft will blur the distinction between PCs and phones with "universal apps," Cortana, Bing, and shared information across platforms, which could make Windows 10 Phones a lucrative choice for Windows 10 PC users.

Moreover, app developers who weren't impressed by Windows Phone's slim market share could be more willing to write apps that can also be used on the Xbox Ones, Windows PCs, and Windows tablets.

Pricing remains the top factorIn January, Microsoft launched the Nokia 215, its cheapest "smartphone" to date. The $29 Series 30+ device is loaded with basic apps like Facebook, Twitter, Bing Search, MSN Weather, and Opera Mini, and is intended to be a "gateway" device to get users hooked on the mobile Internet.

Last July, Microsoft launched its cheapest Windows Phone, the 4" Lumia 530, for €85 ($95). The device now accounts for 5% of the Windows Phone market, according to AdDuplex's February figures. The 530 replaced the best-selling Lumia 520, which still accounts for 23% of the Windows Phone market.

The Lumia 520. Source: Microsoft.

Microsoft's rivals have also noticed that the $100 price point is a sweet spot for emerging markets like India. Last year, Google partnered with Indian smartphone manufacturers to launch several Android devices for around $100 each via its "Android One" initiative. In January, Samsung also launched its first Tizen OS phone, the Samsung Z1, for less than $100 in India.

The one thing Microsoft must get rightSince the low-end market is getting crowded, Microsoft needs Windows 10 to help its smartphones stand out. But a key challenge that Microsoft must first address is scaling the new OS down for the cheapest and most popular Windows Phones.

Back in February, Microsoft's Joe Belfiore assured Twitter followers that Microsoft would launch Windows 10 on devices with 512MB of RAM, including the Lumia 520. However, he warned that actual "features may vary." This likely means that the 520 probably won't be able to run universal apps designed for higher-end devices. This could cause problems if developers try to reach a larger audience by developing apps with PC, tablet, and Xbox One specs in mind.

However, if Microsoft can tether the low-end Lumias to the Windows 10 ecosystem with key apps like Mail, Calendar, Office, OneDrive, and Cortana, it can still help even the odds against Google's formidable ecosystem of apps and services.

The road aheadInstead of battling Android and iOS with an isolated Windows Phone OS, Microsoft is finally uniting all of its devices under a single operating system. Just as Google is leveraging its mobile strength to creep into the PC market with Chromebooks, Microsoft is flexing its PC market muscles to push back into the mobile market.

It's too early to tell if Microsoft's plan will succeed, but the company needs to make sure that Windows 10 runs well on its popular low-end devices before it can successfully grow its mobile footprint against Google and Apple.

Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Apple, Facebook, Gartner, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!